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INVESTMENT COMPANY INSTITUTE
®
PERSPECTIVE
Vol. 6 / No. 2
Febr uar y 2000
Mutual Fund Assets and
Flows in 1999
Perspective is a series
of occasional papers
Equity Funds
Equity mutual fund assets increased 36 percent
in 1999 to $4.039 trillion. Fund performance
accounted for about 80 percent of the growth.
Net new cash flow to equity funds rose 19
percent to $188 billion. Domestic equity funds
accounted for most of the net flow.
Among domestic equity funds, those with
relatively large investments in technology stocks
captured a disproportionate share of the net
flow. In addition, the inflow to index funds
continued to rise.
New sales of all equity funds increased to $918
billion in 1999. As a percentage of average
assets, new sales were unchanged at 26 percent,
after declining during the previous two years.
Redemptions rose to $743 billion or 21 percent
of average assets from 20 percent in 1998.
The monthly pattern of net new cash flow to
equity funds suggests that fund investors did
not redeem or curtail fund investments in
anticipation of potential Y2K problems.
by Brian Reid and Kimberlee Millar 1
published by the
Investment Company
Institute, the national
American investment
SUMMARY
U.S. and world financial markets produced a
company industry.
mixed environment for mutual funds and their
association of the
shareholders in 1999. In the U.S., technology and
John Rea,
executive editor;
Craig Tyle,
executive editor;
Sue Duncan,
managing editor.
communications stocks performed well. However,
other sectors of the U.S. stock market posted
losses, and more than half of all stocks experienced
price decreases for the year. Furthermore, rising
interest rates led to one of the largest annual
declines in bond prices in 30 years. Outside the
U.S, many foreign stock markets registered strong
1401 H Street, NW
gains, particularly those in Asia.
In this setting, mutual fund assets increased 24
Suite 1200
Washington, DC 20005
w w w. i c i . o r g
percent to $6.843 trillion. About one-quarter of
the growth was attributable to net new investments
Bond Funds
by mutual fund shareholders, which totaled $364
Assets in bond funds fell 3 percent in 1999 to
$808 billion. The decline was attributable to
rising interest rates, which lowered bond fund
returns. Net new cash flow declined to –$5
billion in 1999, down from $75 billion in 1998.
Mutual fund complexes continued to consolidate government and municipal bond funds in
1999. Investor demand for these funds has been
billion; most of the remainder came from investment performance. Net flows rose for equity funds
in 1999 compared with 1998, but declined for
other major investment objectives.
This issue of Perspective reviews mutual fund
asset growth and net flows in 1999. Highlights of
the review include the following.
1
Brian Reid is Assistant Vice President and Director of Industry and Financial Analysis, and Kimberlee Millar is Senior Research Associate
at the Investment Company Institute. Travis Lee provided research support, and Janet Thompson-Conley prepared the charts and tables.
INVESTMENT
COMPANY ®
INSTITUTE
weak since the mid-1990s, leading many complexes to merge or
liquidate their smaller funds.
outflow that often occurs during the second
half of December.
MUTUAL FUND ASSETS AND FLOWS
Hybrid Funds
Assets in hybrid funds — those investing in a mix of stocks and
bonds — rose 5 percent to $384 billion.
Total mutual fund assets increased 24 percent in
The modest growth resulted from a combination of fund performance,
which was held down by the decline in bond prices, and a net outflow
of $12 billion.
performance, largely from rising stock prices,
1999 to $6.843 trillion (Figure 1).2 Investment
accounted for about two-thirds of the asset
growth. Net new cash flow of $364 billion
accounted for 28 percent of the increase in assets,
Money Market Funds
with the remainder of the growth attributable to
Assets in money market funds rose 19 percent in 1999 to $1.612
trillion. Net new cash flow of $194 billion was the second highest
annual flow on record.
new funds.
Net new cash flow to equity funds rose,
generally reflecting strength in the major stock
Net flow to retail money funds was $82 billion, second only to the
record $131 billion in 1998. Inflows slowed from their 1998 pace
during the first half of 1999 as yields on retail money funds fell relative
to rates on bank and thrift deposits. The slowdown may also have
reflected a decline in household demand for liquidity.
price indexes. Bond funds posted a net outflow, as
rising interest rates deterred investors. Hybrid
funds, which invest in both stocks and bonds, also
were adversely affected by rising interest rates,
Net flows to retail money funds were not appreciably stronger than
usual near yearend, providing further evidence that individuals’ reaction
to potential Y2K problems was muted.
posting a net outflow for the year. Finally, the
Institutional money funds experienced a record net inflow of $112
billion in 1999. Some of the pickup reflected an absence of a seasonal
substantial.
flow of new cash to money funds declined from
the record high in 1998 but nonetheless was
FIGURE 1
Net New Cash Flow to Mutual Funds, 1985-1999
(billions of dollars)
Equity
Bond
Hybrid
Money Market
Total
Total Mutual
Fund Assets
1985
1986
1987
1988
1989
8
22
19
–16
6
63
103
7
–4
–1
2
6
4
–3
4
–5
34
10
0
64
68
164
40
-23
73
495
716
769
809
981
1990
1991
1992
1993
1994
13
39
79
129
119
6
59
71
73
–65
2
8
22
39
21
23
5
–16
–14
9
44
112
155
228
84
1,065
1,393
1,643
2,070
2,155
1995
1996
1997
1998
1999
128
217
227
157
188
–11
3
28
75
–5
5
12
16
10
–12
89
89
102
235
194
212
321
374
477
364
2,812
3,526
4,468
5,525
6,843
Source: Investment Company Institute
2
Asset and flow data for 1999 are preliminary and are subject to revision.
Perspective / pag e 2
FIGURE 2
Equity Fund Net New Cash Flow, 1990-1999
(billions of dollars)
189
International/Global
177
169
Domestic
150
117
91
75
72
38
36
6
6
1990
3
1991
48
44
38
12
7
1992
1993
1994
1995
11
8
1996
1997
1998
1999
Sources: Investment Company Institute
EQUITY FUNDS
or indirectly increased by more than 20 percent to 49 million in early
Assets in equity funds rose 36 percent in 1999
1999.3 Despite the net sale of stocks by households, rising equity prices
to $4.039 trillion. Investment performance
pushed the dollar value of total household equity holdings to $10.8 trillion
accounted for about four-fifths of the asset
or about 34 percent of household financial assets at the end of the third
growth. Net new cash flow totaled $188 billion,
quarter of 1999.4
up 19 percent from the $157 billion in net flow
in 1998. Domestic equity funds accounted for
Domestic Equity Funds
most of the net flow to equity funds.
Net new cash flow to domestic equity funds rose to $177 billion in 1999
The increase in net flow to equity funds,
coming primarily from higher net purchases of
equity funds by households, contrasted with
their continued selling, on balance, of direct
stock holdings. As has been the case since 1994,
households sold more of direct holdings of
stocks last year than they indirectly acquired
from $150 billion in 1998 (Figure 2).5 Net flows began the year at a
subdued pace, averaging $12 billion per month in the first quarter, the
lowest level in a first quarter since 1995.6 Net flows picked up in the
spring and averaged $15 billion per month over the last nine months of
the year. Overall, the net flow in 1999 to domestic equity funds was
second only to the record net flow in 1997.
Even though domestic equity funds collectively experienced an increase
through mutual funds. The net sale of equity
in net new cash flow in 1999, net flows across individual domestic equity
over the past six years has occurred even though
funds were more concentrated than normal. The 10 percent of domestic
the number of households owning stocks directly
funds with the largest inflows had a total net new cash flow of $286 billion
3
The estimated number of households owning stock in 1999 is from Equity Ownership in America, Investment Company Institute and the Securities Industry
Association, Washington, DC, 1999, p. 13. The estimated number of households in 1995 was 40.4 million and is from “Recent Changes in U.S. Family Finances:
Results from the 1998 Survey of Consumer Finances,” Federal Reserve Bulletin, Vol. 86, No.1, January 2000, p. 15.
4
The Flow of Funds Accounts of the United States: Flows and Outstandings Third Quarter 1999 (December 15, 1999), Board of Governors of the Federal Reserve
System, Washington, DC indicate that residents of foreign countries and state and local government pension plans were net buyers of equities during the 1990s.
5
Domestic equity funds consist of aggressive growth, growth, sector, income, and growth and income funds. At yearend 1999, there were 3008 domestic equity funds in
the ICI database with $3.455 trillion in assets.
6
Net flow to domestic equity funds averaged $6.8 billion per month in the first quarter of 1995.
Perspective / pag e 3
in 1999, meaning that the remaining 90 percent
FIGURE 3
Ratio of Net Flows to Domestic Equity Funds in the Top Decile of
Net Flows to Total Domestic Equity Fund Net Flows, 1990-1999
combined for a net outflow of $109 billion. The
ratio of the net flow of the top 10 percent to the
total net flow for all domestic equity funds was
1.62, the highest level since 1990 (Figure 3).7 By
1.96
comparison, the ratio ranged between 0.83 and
1.62
Reflecting the greater concentration of net
1.25
1.02
1.00
0.83
0.84
0.94
0.92
1.25 between 1991 and 1998.
flows, the percentage of domestic equity funds
posting a net inflow declined to 58 percent in
0.92
1999 from 65 percent in 1998 (Figure 4). The
percentage in 1999 was the lowest since 1990,
when only 55 percent experienced a net inflow.
Between 1991 and 1998, the percentage of
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
domestic funds with a net inflow fluctuated
between 63 percent and 74 percent.
Source: Investment Company Institute
The increased concentration in net flows to
domestic equity funds partly reflected strength in
FIGURE 4
Percentage of Domestic Equity Funds with Net Inflows, 1990-1999
prices of technology stocks. These stocks posted
gains in 1999 that greatly exceeded the market as
a whole. Indeed, 56 percent of all stocks listed on
74
74
72
67
63
U.S. exchanges declined last year,8 whereas the
71
66
technology-laden Nasdaq 100 index more than
65
58
55
doubled in 1999 and the Nasdaq index rose 86
percent. The S&P 500 index and the Russell
2000, which have smaller technology components,
rose 20 percent.
The average return on domestic equity funds
exceeded the return on the S&P 500 index,9 but a
disproportionate share of the net flows went to
funds benefiting from relatively large investments
in technology stocks.10 For example, in a sample
of 1,520 domestic stock funds, the 10 percent
1990
1991
1992
1993
1994
1995
1996
1997
1998
Source: Investment Company Institute
1999
with the highest net new cash flows had about 30
percent of their assets in technology stocks,
7
The ratio in 1990 was elevated in part because the net flow to domestic equity funds was only $6 billion.
8
Associated Press
9
Lipper —Equity Fund Performance Analysis, Fourth Quarter 1999, REUTERS SA
10
The strong performance of technology stocks in 1998 and 1999 likely contributed to the heaviest inflows going to stock funds holding such stocks. Erick R. Sirri and
Peter Tufano, “Costly Search and Mutual Fund Flows,” Journal of Finance, Vol. 53, October 1998, pp. 1589-1622, found that investors in equity funds tend to invest
more heavily in those with the best previous-year performance.
Perspective / pag e 4
roughly double that of the 10 percent with the
lowest net flows (Figure 5).11 Investor preference for funds with significant exposure to the
technology sector similarly was reflected in net
FIGURE 5
Average Share of Equity Fund Portfolios Invested in Technology
Stocks, by Total Net New Cash Flow
(percent)
32
new cash flows by investment objective. Capital
appreciation funds12 nearly doubled their net
29
flow in 1999 to $160 billion from $83 billion
in 1998. In contrast, the net flow to funds with
22
13
a total return objective fell to $16 billion in
24
19
1999 from $67 billion in 1998.
17
17
2
3
16
15
Domestic equity index funds also continued
17
to attract investor interest in 1999.14 Net new
cash flow to these funds was $53 billion, up
from $38 billion in 1998 (Figure 6). During
the last five years, index funds, particularly
S&P 500 index funds, gained in popularity,
rising from 2 percent of all net new cash flow
Decile Based Upon
Net New Cash Flow1 1
4
5
6
7
8
9
10
1
to domestic funds in 1994 to 30 percent in
1999. Over this period, the large capitalization
stocks generally outperformed smaller capitalization stocks. As a result, index funds, which
tend to hold large capitalization stocks, generally outperformed many small-stock and
The first decile contains the 152 funds with the smallest net new cash flows. The second decile contains
the 152 with the next smallest net new cash flows. The remaining deciles are similarly defined.
Sources: Morningstar, Inc. and Investment Company Institute
FIGURE 6
Net New Cash Flow and Assets of Domestic Equity Index Funds,
1990-1999
(billions of dollars)
actively managed funds, which invest more
Net Flow
heavily in medium and small capitalization
Assets
1990
1
1991
2
7
1992
3
12
1993
3
16
Assets of international/global equity funds
1994
2
19
increased 49 percent to $584 billion in 1999.16
1995
6
34
Investment performance was responsible for
1996
15
60
1997
24
141
1998
38
230
1999
53
338
stocks.15
International and Global Equity Funds
virtually all of the growth in assets, as net new
cash totaled $11 billion.
3
Source: Investment Company Institute
11
Fund investments in various sectors were estimated using data from ICI and Morningstar, Inc. Morningstar has data on equity fund investments by industry sector.
These funds could be matched with 1520 domestic equity funds in the ICI database. These funds represent 51 percent of domestic equity funds in the ICI database,
accounting for 77 percent of assets and 60 percent of net new cash flow. These funds were first ranked by net flows and then placed into deciles. The first decile
contained the 152 funds with the lowest net flows; the second decile contained the 152 funds with the next lowest net flows; and so on for the remaining deciles.
12
Capital appreciation funds consist of aggressive growth, growth, and sector funds.
13
Total return funds consist of income and growth and income funds.
14
The ICI database contained 117 domestic equity index funds at yearend 1999. About 60 percent of them were in the growth and income category.
15
Index funds made up nearly 10 percent of domestic equity fund assets last year, compared with 2 percent in 1990.
16
International and global equity funds consist of emerging market, global, international, and regional equity funds. At yearend 1999, the ICI database contained 956 of
these funds.
Perspective / pag e 5
The relatively low level of net flow to
FIGURE 7
international/global funds occurred even
New Sales and Redemptions of Equity Funds, 1990-1999
though most foreign stock markets posted
(billions of dollars)
sizable gains, as did world equity funds generally.17 The sluggish pace of inflows to these
As a Percentage of
Average Assets
New Sales
Redemptions
New Sales
funds was a continuation of a trend that began
Redemptions
in October 1997 with the economic and financial crises in many emerging market countries.
1990
64
45
26
18
1991
91
54
28
16
1992
135
62
29
13
foreign-related funds was reinforced with the
1993
216
93
34
15
decline in foreign stock prices in late summer
1994
257
142
32
18
of 1998. For the twelve-month period begin-
1995
287
172
27
16
1996
442
241
30
16
1997
579
362
28
18
1998
700
534
26
20
tive outflow over the entire period was $19
1999
918
743
26
21
billion. During the last five months of 1999,
The reluctance of U.S. fund owners to invest in
ning in August 1998 and ending in July 1999,
international/global funds posted net outflows
in ten of the twelve months, and the cumula-
however, net inflows resumed, with investors
Source: Investment Company Institute
adding, on balance, $18 billion to these funds.
FIGURE 8
Redemptions of Equity Funds, 1998-1999
(percent of previous month assets)
2.32
2.19
1.89
1.71
1.64
1.50
1.60
1.59
1.83
2.15
2.23
2.06
1.94
1.87
1.73
1.69
1.66
1.75
1.86
1.67
1.71
8/99
9/99 10/99 11/99 12/99
1.69
1.50
1.31
1/98
2/98
3/98
4/98
5/98
6/98
7/98
8/98
9/98 10/98 11/98 12/98 1/99
2/99
3/99
4/99 5/99
6/99
7/99
Source: Investment Company Institute
17
The annual return on international/global equity funds was 43 percent according to Lipper —Equity Fund Performance Analysis, Fourth Quarter 1999, REUTERS
SA.
Perspective / pag e 6
New Sales and Redemptions of
Equity Fund Shares
FIGURE 9
New sales of all equity fund shares rose 31
New Sales, Redemptions, Net Exchanges and
Net New Cash Flow to Equity Funds, 1999
percent in 1999 to a record $918 billion (Figure
(billions of dollars)
7). New sales exclude sales arising from the rein-
New Sales
vestment of dividends and capital gains distribu-
Redemptions
Net Exchanges
Net New
Cash Flow 1
tions and the exchanges from other funds within
January
78.1
64.1
3.3
a fund family. New sales were 26 percent of aver-
February
65.0
59.8
–4.5
0.8
March
81.6
69.0
0.1
12.6
April
87.0
64.1
3.0
25.8
May
70.0
56.6
1.6
15.0
June
69.4
53.5
3.2
19.1
rose to $743 billion in 1999. In contrast to new
July
74.8
59.9
–2.7
12.3
sales, redemptions as a percent of equity fund
August
66.3
56.3
–0.7
9.4
assets rose to 21 percent from 20 percent in
September
67.4
57.0
0.7
11.0
October
72.8
55.9
4.1
21.0
age assets, unchanged from 1998 after declining
17.3
18
during the previous two years. Share redemptions, other than those through exchanges, also
1998.
19
During the last two years, the redemption rate
moved somewhat above the range of rates that
prevailed from 1990 to 1997. To some extent,
November
82.9
65.3
1.5
19.0
December
103.1
81.9
3.0
24.3
TOTAL FOR 1999
918.3
743.3
12.5
187.5
1
the increase may have reflected investor caution
Net new cash flow equals new sales minus redemptions plus net exchanges.
Source: Investment Company Institute
following the sell-off in equity markets worldwide in August 1998. On a monthly basis, the
rate of redemptions increased in that month and
rose higher in December 1998 (Figure 8).20 The
redemption rate began to work its way downward in the spring, and remained at a lower level
until rising at the end of the year.
been the most evident (Figure 9). In fact, the net flow of $64 billion in the
fourth quarter was the largest quarterly flow in 1999 and the highest since
the third quarter of 1997. The increase in cash flow in the fourth quarter
reflected higher new sales of shares, which ran counter to the typical
seasonal slowdown in sales. In the fourth quarter, investors generally postpone share purchases in advance of capital gains distributions that occur in
Net New Cash Flows and Y2K Concerns
November and December to avoid paying taxes on those distributions.
The monthly pattern of net new cash flows to
BOND FUNDS
equity funds suggests that fund investors did not
redeem or curtail fund investments in anticipation of potential disruptions in equity markets
associated with Y2K computer software problems. Net new cash flows actually strengthened
during the last three months of the year when
concerns about Y2K issues likely would have
Assets in bond funds fell 3 percent in 1999 to $808 billion.21 The decline
was attributable to rising interest rates and falling bond prices.
Intermediate- and long-term interest rates, which had reached 30-year lows
in the fall of 1998, rose throughout 1999. The yield on the 10-year
Treasury note, for example, gained 11/2 percentage points during the year
and its price dropped 13 percent.22 This marked the largest one-year drop
in Treasury prices since 1994.
18
New sales as a percentage of average assets is the sum of new sales for the year divided by the average of current and prior yearend assets.
19
Redemptions as a percent of average assets is the sum of redemptions for the year divided by the average of current and prior yearend assets.
20
Monthly redemption rates are computed by dividing total redemptions for the month by assets at the end of the previous month.
21
Bond funds consist of taxable (corporate, high-yield, world, and government) and municipal bond funds. At yearend 1999, there were 2266 bond funds in the ICI
database.
22
Computed from the Merrill Lynch Price Index for the 10-year Treasury note.
Perspective / pag e 7
previous month-end assets, compared with 3.9
FIGURE 10
percent in 1998. The average rate of monthly
Net New Cash Flow to Bond Funds, 1999
redemptions (including exchange redemptions)
(billions of dollars)
Taxable
Municipal
Total
rose to 3.3 percent in 1999 from 2.9 percent in
1998. The combination of lower sales and
January
6.4
2.0
8.4
higher redemptions was consistent with the
February
3.3
1.0
4.4
patterns and magnitudes exhibited during other
March
4.6
1.6
6.2
periods of rising interest rates over the past 25
April
2.0
–0.4
1.7
years.24
May
–1.6
–0.4
–1.9
June
1.7
0.2
1.9
Municipal Bond Funds
July
1.4
–0.9
0.5
Assets of municipal bonds fund fell 9 percent to
August
0.5
–1.5
–1.0
September
–2.0
–1.9
–3.8
annual decline since 1994. About two-thirds of
October
–2.0
–1.6
–3.5
the decline was attributable to fund perfor-
November
–1.4
–3.3
–4.7
mance, with the remainder resulting from a $12
December
–6.2
–7.2
–13.5
6.8
–12.1
–5.4
TOTAL FOR 1999
Source: Investment Company Institute
$272 billion from $299 billion in 1998, the first
billion net outflow. As with taxable bond funds,
new sales declined and redemptions rose. New
sales slowed to an average monthly rate of 2.1
percent of previous month-end assets in 1999
In this environment, the average return was 1.0 percent on taxable
bond funds and –3.8 percent on tax-exempt bond funds.23 Net new cash
flow to bond funds, which typically declines when interest rates rise, fell
to –$5 billion in 1999 from $75 billion in 1998. Net flow began the year
at a strong pace, totaling $19 billion during the first quarter (Figure 10).
As interest rates rose, monthly net flows turned negative and cumulated
to –$24 billion over the last three quarters. The level of net outflows
increased in the last quarter, as many investors likely sold funds for tax
purposes, as they did in 1994 when many bond funds also posted losses
for the year.
Taxable Bond Funds
Assets of taxable bond funds rose 1 percent to $537 billion in 1999. Net
new cash flow fell to $7 billion in 1999 from $59 billion in 1998,
reflecting both a decline in new sales and a pickup in redemptions.
Monthly new sales (including exchange sales) averaged 3.4 percent of
from 2.3 percent in 1998, while the redemption
rate rose to 2.5 percent from 1.9 percent.
Consolidation of Bond Funds
Since 1995, mutual fund complexes have gradually consolidated municipal and government25
bond funds. In 1999, the number of municipal
bond funds declined for the fifth consecutive
year to 888 from 900 in 1998, and the number
of government bond funds dropped to 379 from
395 (Figure 11). The number of municipal bond
funds peaked at 1,012 in 1994, while the peak
in government funds also occurred in 1994 at
442. The reduction in the number of municipal
and government bond funds occurred at a time
when investor demand for these funds appears
23
Lipper —Taxable Fixed Income Fund Performance Analysis, Fourth Quarter 1999, REUTERS SA and Lipper —Tax-Exempt Fixed Income Fund Performance
Analysis, Fourth Quarter 1999, REUTERS SA.
24
For instance, monthly redemptions (including exchange redemptions) averaged 3.3 percent of previous month assets in 1993 and 1994 when bond prices experienced a
slightly larger decline. Sales (including exchange sales) averaged 3.2 percent. See Brian Reid, “Growth and Development of Bond Mutual Funds,” Perspective, Vol. 3,
No. 2, June 1997.
25
The government investment objective consists of government bond — general, government bond — intermediate, government bond — short-term, and mortgage-backed
bond funds.
Perspective / pag e 8
to have remained fairly flat, after growing
rapidly between 1990 and 1993.26
FIGURE 11
Number of Bond Funds, 1985-1999
The merged or liquidated funds tended to be
small. In 1999, 39 municipal bond funds were
Municipal Bond Funds
1012 1010
merged or liquidated, with average assets of $60
981
933
million27 compared with average assets of $306
900
888
28
million for the surviving funds. The 30
796
government bond funds that were merged or
liquidated in 1999 had average assets of $94
628
million,29 compared with $367 million for the
surviving funds.30
523
414
HYBRID FUNDS
438
464
366
Assets in hybrid funds — those investing in both
stocks and bonds — rose 5 percent in 1999 to
31
$384 billion. The modest asset growth resulted
247
174
from fund performance, which was held down
by the decline in bond prices, and from a net
outflow of $12 billion, the first annual outflow
’85
’86
’87
’88
’89
’90
’91
’92
’93
’94
’95
’96
’97
’98
’99
420
422
407
395
379
’97
’98
’99
since 1988 (Figure 12). Net new cash flow turned
negative after the stock market sell-off in the
summer of 1998 and remained negative through-
Government Bond Funds
442
out most of 1999.
397
332
The decline in net flow reflected an increase
244
in redemptions rather than a slowdown in new
248
’89
’90
278
201
sales, which remained about unchanged in
1999. Redemptions rose to $72 billion in 1999
263
139
93
from $55 billion in 1998. As a percentage of
assets, they rose to 21 percent from 19 percent
’85
’86
’87
’88
’91
’92
’93
’94
’95
’96
in 1998.
Source: Investment Company Institute
26
Since 1994, net new cash flows to government bond funds were negative in every year except 1998, with net outflows averaging $6.60 billion each year compared with
average annual net inflow of $6.15 billion between 1990 and 1993. Similarly, annual net outflows from municipal bond funds averaged about $4 billion each year since
1994, compared with average annual net inflow of $24 billion between 1990 and 1993.
27
The median asset level of the merged or liquidated municipal bond funds was $22 million.
28
In 1999, 31 of the 39 merged or liquidated municipal bond funds were single-state funds.
29
The median asset level of the merged or liquidated government bond funds was $35 million.
30
Fund mergers, acquisitions, and other reorganization transactions involve a number of legal, compliance, and operational issues. In a fund acquisition, for example, a
new advisory contract must be approved by a majority of the independent directors of the target fund’s board, as well as its shareholders. In fulfilling this obligation and
their broader responsibility to safeguard the rights and interests of the fund’s shareholders, the independent directors must determine, among other things, that the
transaction is in the best interests of the shareholders.
31
Hybrid funds consist of asset allocation, balanced, flexible portfolio, and income-mixed funds. At yearend 1999, there were 533 hybrid funds in the ICI database.
Perspective / pag e 9
declined to $82 billion in 1999 from $131
FIGURE 12
billion in 1998 (Figure 13). Inflows to retail
Net New Cash Flow to Hybrid Funds, 1985-1999
funds typically slow when yields on retail money
(billions of dollars)
funds fall relative to rates on bank and thrift
39
deposits, as occurred during the first part of
1999. Monthly net flows did not increase appreciably until the second half of the year when the
yield advantage of money funds widened
significantly.
22
21
The slowdown in net new cash flow to retail
16
money funds also may have reflected a decline
in household demand for liquidity. Net inflows
12
10
strengthened noticeably after the stock market
8
6
4
sell-off in the summer of 1998 and remained
5
4
strong through February 1999.32 As the U.S.
2
2
stock market recovered from a drop in February
1999, net flows to retail money funds declined.
–3
In fact, from March through June the net flow
to retail funds was at the lowest level during that
–12
’85
’86
’87
’88
’89
’90
’91
’92
’93
’94
’95
’96
’97
’98
’99
Source: Investment Company Institute
four-month period since 1993.33
Inflows to retail money funds did not
increase appreciably near yearend, providing
further evidence that individuals’ reaction to
MONEY MARKET FUNDS
potential Y2K problems was muted. Monthly
Assets of money market funds rose 19 percent in 1999 to $1.612 tril-
inflows averaged $9 billion during the last quar-
lion. Net new cash flow was $194 billion, down from the record $235
ter of 1999, somewhat higher than for the same
billion in 1998. Nonetheless, the net flow in 1999 was the second high-
period in 1996 and 1997 and less than in 1998.
est on record. The slowdown in net flow occurred entirely at retail
money funds, which are primarily held by individuals. In contrast, insti-
Institutional Funds
tutional funds — held primarily by businesses, pension funds, financial
Assets in institutional money funds rose 26
institutions, and governments — posted a record inflow in 1999.
percent in 1999 to $648 billion. Net new cash
flow rose to a record $112 billion, surpassing
Retail Funds
1998’s net flow of $104 billion by 7 percent.
Retail money funds posted an increase in assets of 15 percent in 1999,
The increase in assets in 1999 extended the
rising from $835 billion in 1998 to $964 billion in 1999. Asset growth
rapid growth that began in 1994. This growth
slowed from the 26 percent pace in 1998, largely because net inflow
partly reflected a shift by corporate cash
32
Inflows to retail money funds in January and February 1999 were $6 billion more than the same period in 1998, $24 billion more than in 1997, and $17 billion more
than in 1996.
33
Outflows from retail money funds during these four months in 1999 were $13.9 billion. In 1993, there were outflows of $16.6 billion during this period.
Perspective / pag e 10
managers to money funds from other liquid
assets (Figure 14).
The stronger net flows to institutional
money funds last year also reflected a build up
FIGURE 13
Net New Cash Flow to Money Market Funds, 1990-1999
(billions of dollars)
131
Retail
in balances at yearend. Institutional money
funds typically experience a drop in assets over
82
the last half of December, partly resulting from
63
quarterly corporate tax payments in midDecember. In addition, money market rates
53
45
24
9
often rise relative to money fund yields at year-
3
end, causing some institutional cash managers
–11
to shift from money funds into money market
–25
1990
instruments.34 This seasonal pattern, however,
1991
1992
1993
1994
1995
1996
1997
1998
1999
did not materialize in 1999, as assets of institutional funds increased $17 billion over the last
two weeks in December. In contrast, between
Institutional
112
104
1996 and 1998, assets of institutional funds
declined $22 billion, on average, over the
57
second half of December.
37
26
Institutional investors may have added to
14
9
2
balances at money funds because of uncertain-
–3
ties surrounding the potential for computer
–15
problems at the turn of the year. The absence
of outflows also reflected steps taken by the
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Source: Investment Company Institute
Federal Reserve to keep overnight interest rates
from rising at yearend.35 As a result, overnight
FIGURE 14
interest rates were below yields on many insti-
Money Market Fund Share of Business Liquid Assets, 1985-1999*
tutional money funds during the last week of
(percent)
December, giving institutional investors an
25
incentive to maintain balances in money funds
20
rather than directly holding money market
15
instruments.
10
5
0
’85
’86
’87
’88
’89
’90
’91
’92
’93
’94
’95
’96
’97
’98
’99
*Third quarter
Source: Federal Reserve Board
34
Institutional money fund managers prepare for such outflows by increasing their holdings of overnight securities relative to longer maturity instruments. As a result,
the average maturity of institutional money fund portfolios declines in December. For example, from 1996 to 1998, the average maturity fell by 3 days over the last three
weeks of December. In 1999, the average maturity fell by 7 days, indicating that institutional money funds increased their holdings of overnight securities more than
usual. Data obtained from IBC’s Money Fund Report, IBC Financial Data, Inc.
35
The Federal Reserve took a number of steps to keep overnight interest rates from rising near yearend. A discussion of these actions can be found in “Domestic Open
Market Operations During 1999” Federal Reserve Bank of New York, Markets Group, pp. 27-35.
Perspective / pag e 11
Back issues of Perspective, written by Institute staff, leading scholars, and other contributors, address public policy issues of
importance to mutual funds and their shareholders. Contact the Institute’s Public Information Department at 202/326-5945
for more information. All issues of Perspective are also available on the Institute’s website; for an online index of issues, see
http://www.ici.org/economy/perspective.html.
Vol. 1, No. 1, July 1995:
“Mutual Fund Shareholder Response to
Market Disruptions”
Richard Marcis, Sandra West,
Victoria Leonard-Chambers
Vol. 1, No. 2, November 1995:
“Improving Mutual Fund Risk Disclosure”
Paul Schott Stevens, Amy Lancellotta
Vol. 2, No. 1, January 1996:
“Mutual Fund Regulation: Forging a New Federal and
State Partnership”
Matthew P. Fink
Vol. 2, No. 2, March 1996:
“Mutual Fund Shareholder Activity During U.S. Stock
Market Cycles, 1944-95”
John D. Rea, Richard Marcis
Vol. 2, No. 3, April 1996:
“The Coming Crisis in Social Security”
Dr. John B. Shoven
Vol. 2, No. 4, May 1996:
“Investing the Assets of the Social Security
Trust Funds in Equity Securities: An Analysis”
Lawrence J. White
Vol. 2, No. 5, June 1996:
“Helping America Save for the Future”
Sen. J. Robert Kerrey,
Jon S. Fossel, Matthew P. Fink
Vol. 2, No. 6, December 1996:
“U.S. Emerging Market Funds: Hot Money or Stable
Source of Investment Capital?”
John D. Rea
Vol. 3, No. 1, March 1997:
“Mutual Fund Developments in 1996”
Brian K. Reid
Vol. 3, No. 2, June 1997:
“Growth and Development of Bond Mutual Funds”
Brian K. Reid
Vol. 3, No. 3, July 1997:
“Continuing a Tradition of Integrity”
Barry P. Barbash, Don Powell, Matthew P. Fink
Vol. 3, No. 4, August 1997:
“Selected Issues in International Taxation of Retirement
Savings”
Paul Schott Stevens
Vol. 3, No. 5, December 1997:
“Stock Markets, Economic Development, and
Capital Control Liberalization”
Ross Levine
Vol. 4, No. 1, March 1998:
“Mutual Fund Developments in 1997”
Brian K. Reid, Samuel Ankrah,
Kimberlee Millar
Vol. 4, No. 2, June 1998:
“U.S. Emerging Market Equity Funds and the
1997 Crisis in Asian Financial Markets”
Mitchell A. Post, Kimberlee Millar
Vol. 4, No. 3, November 1998:
“Trends in the Ownership Cost of Equity Mutual Funds”
John D. Rea, Brian K. Reid
Vol. 5, No. 1, January 1999:
“401(k) Plan Asset Allocation, Account Balances, and
Loan Activity”
Jack VanDerhei, Russell Galer,
Carol Quick, John D. Rea
Vol. 5, No. 2, February 1999:
“Mutual Fund Developments in 1998”
Brian K. Reid, Kimberlee Millar
Vol. 5, No. 3, March 1999:
“Total Shareholder Cost of Bond and
Money Market Mutual Funds”
John D. Rea, Brian K. Reid
Vol. 5, No. 4, September 1999:
“Mutual Fund Costs, 1980–1998”
John D. Rea, Brian K. Reid, Travis Lee
Vol. 5, No. 5, December 1999:
“Operating Expense Ratios, Assets, and
Economies of Scale in Equity Mutual Funds”
John D. Rea, Brian K. Reid,
Kimberlee W. Millar
Vol. 6, No. 1, January 2000:
“401(k) Plan Asset Allocation, Account Balances, and
Loan Activity in 1998”
Sarah Holden, Jack VanDerhei,
Carol Quick
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